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Who Can We Blame for High Gasoline Prices?

Posted February 29, 2012

With gasoline prices having risen on average about $.60 in the last 3 months (chart here), reaching a nationwide average of $3.69/gallon this week, consumers are naturally unhappy with the amount of money they’re having to shell out every time they fill up their tanks. Higher gasoline prices are also threatening our economic recovery, as businesses who use significant amounts of gasoline see their margins stretched to the limit, and consumers are left with less money after filling up to spend or save elsewhere.

So who can we blame?

It’s tempting to assume the rise in gasoline prices is President Obama’s fault, but this isn’t quite fair. A few weeks ago Resourceful Earth posted about why Obama wasn’t responsible for the increase in oil production, though that didn’t stop him from taking credit for it (it’s worth pointing out that oil drilling on federal lands is actually down, and the net increase is due to increases in drilling on private lands). This story is similar: an overwhelming portion of the price of gasoline is determined by world oil markets, which U.S. energy policy cannot have a huge effect on. Energy analyst and blogger Robert Rapier sums it up:

In both interviews, I made the point that President Obama is absolutely not responsible for current gas prices. If McCain had been elected, gas prices would still be where they are, and Democrats would be using the issue against him. The reason for this is that projects that bring gasoline to consumers take years to execute. If President Obama declared tomorrow that oil companies could drill anywhere they wanted, it would have no impact on supplies (and by extension, fuel prices) for years. Further, there are no assurances that even this would moderate gasoline prices, because these prices are increasingly being driven by factors outside of the United States.

This last point is important, and it is critical to understand if you want to understand why gasoline prices are rising. If you look at consumption habits around the world, it is true that in the U.S. gasoline demand has plummeted. We might expect that we should therefore see falling gasoline prices. But the oil markets are not limited to the borders of the United States, and the U.S. is still heavily dependent upon oil imports (and hence, we pay the world price) for the fuel that we produce. As long as growth in developing countries remains strong, people there are happy to buy the oil products that the U.S. or EU is not using, keeping the price pressure very high. In a nutshell, the price of gasoline is not determined by U.S. presidential policy, but rather by how much people in India, Vietnam, or China are willing to pay for oil. Demand growth in those countries has been extremely strong even in the face of $100 oil, and that is a fundamental reason why there has been no gas price relief despite that fact that 1). Gasoline demand in the U.S. is down; and 2). Oil production in the U.S. has been rising.

He also comments on Newt Gingrich’s extraordinary (read: insane) claim that you will see $2.50/gallon gasoline if he is elected President, which is nonsense.

I will point out, however, if you look back in history you will see this argument made over and over by the same folks (environmentalists). They have argued for years that its pointless to open up more of the United States for oil drilling because it won’t have an immediate impact on prices, or the future impact will be small, etc. I recently spoke with a colleague who has been around Washington for a long time, and he mentioned having heard the same argument as far back as 1986(!), when discussing the opening of ANWR for oil drilling. It’s safe to say that if over the years the U.S. had aggressively pursued oil production — or, more accurately, gotten out of the way and allowed the private sector to develop as much as the market thought was appropriate — that oil prices would have been lower over the past years. It’s hard to say how much lower they would be, possibly not much, but even a small reduction in the price of gasoline saves consumers across the country significant amounts of money when added up.